In mortgage payments, an escrow account is typically a lender-held account that collects portions of your monthly mortgage payment to pay property taxes and homeowners insurance on your behalf. Lenders use escrow accounts to ensure taxes and insurance are paid on time — items that, if unpaid, could jeopardize the collateral value. By dividing those costs into monthly portions, the borrower avoids large lump-sum bills at tax or insurance renewal time. Escrow amounts are estimated annually; if taxes or premiums change, the servicer adjusts the monthly escrow portion and notifies the borrower. Escrow simplifies household cash-flow planning at the cost of keeping those funds with the servicer rather than in a personal account.

Practical notes: review your annual escrow statement from the loan servicer to confirm the projected payments and any surpluses or shortages; if there’s a shortage, you may owe a lump-sum make-up payment or a larger monthly escrow portion going forward. Some borrowers prefer to manage taxes and insurance directly (if permitted by the lender) to earn interest on those funds, but lenders often require escrow if the down payment is small. When budgeting, remember that the monthly mortgage payment can include principal, interest, and escrow; separating those line items clarifies what’s building equity versus what’s an advance for third-party bills. If you refinance or sell, the escrow balance is reconciled in closing.